The CME's flagship Eurodollar contract is the world's most actively traded short-term interest rate future, and the related option contracts have similar liquidity. LIFFE's Euribor futures contract is the world's most liquid euro-denominated short-term interest rate future, and the related options enjoy the same market dominance.
Cross-margining will allow members at each exchange using the interest rate contracts to benefit from lower margin requirements wherever there is an offsetting reduction in risk between two contract positions. Those firms establishing in their house accounts a cross-market "spread" between the Eurodollar and Euribor or Euro LIBOR futures or options contracts will receive a reduction in their margin requirements of up to 60 percent.
Eight clearing firms have already signed up to participate in the international cross-margining program. Several others are in the process of finalizing documentation in order to participate. The exchanges and LCH worked actively for several months to obtain the necessary regulatory approvals from the U.S. and U.K. regulators - the Commodity Futures Trading Commission and Financial Services Authority - and to obtain satisfactory legal opinions regarding the enforceability of the international agreement in both countries.
CME Chairman Scott Gordon said: "We are delighted to join with the LCH and LIFFE to offer the industry's first international cross-margining arrangement and to provide our firms with such significant capital savings. Now market participants can enjoy the efficiencies of participating in both the Eurodollar and Euribor - the two largest and most liquid short-term interest rate products in the world."
LCH Chairman Sir Michael Jenkins said: "The team at LCH have successfully worked with their counterparts at the CME to design a robust cross-margining arrangement for house account positions. It seems highly appropriate that two organisations which can justifiably take pride in their risk management record should have taken the first step in arrangements which have long been spoken of but not previously delivered."
LIFFE Chairman Brian Williamson said: "Through our partnership with the CME, we are now able to deliver genuine benefits to our customers through this innovative facility. Efficient use of capital between short-term dollars and euros is of great importance to our customers. We are the first to deliver this as a result of this facility."
Cross-margining is the second initiative the CME and LIFFE have launched as part of their strategic partnership announced last summer. Members of each exchange can also now access the electronically traded products of the other.
